Tag Archives: business

Where Is The Value In A StartUp?

Startup…

“That’s risky, isn’t it?”

I don’t know if this is true but I think people see risk as 2 binary outcomes – ZERO or ONE. Either they’ll see something as very risky or not risky. This is one of the main reasons why entrepreneurs tend to be pig-headed about what they’re pursuing — this has its advantages but reality checks are also necessary.

Back to the question… what is everyone missing?

Optionality!

A startup is a portfolio of options — that’s what gives a startup all of its value. Potentiality is not worthless! Amazingly, people don’t see companies investing in training and development as worthless — that’s creating optionality too. (Side note: we are domain-specific — ask a sky-diver if jumping out of a perfectly good plane is risky).

But, why are some startups able to raise a ton of cash while most don’t?

The main reason is marketing but let’s leave that aside for the moment.

The answer is another question… Does this startup have the capability to realise the potential. Or in options language… will the option(s) embedded in this startup ever be In-The-Money.

And the single biggest determinant of a start-up ever realising its potential are the people behind these options. People determine the likelihood of a business or project ever becoming In-The-Money.

Investors back people, not just ideas.

This also explains why a company with no profit can have an ever-increasing market value.

Power Of Mistakes

Errors, mistakes, miscalculations, stuff-ups, failure are a necessary part of growth, not just in business, but more generally in life.

Without mistakes there is no learning. It’s the critical feedback loop that allows us to adjust our course of action.

Mistakes also allow us to not get stuck. We will never have all the required information to make the best decision — every major decision is most likely not going to be black or white, but grey. Many shades of grey which can cause paralysis.

Paralysis costs time — truly our only non-renewable resource.

The best way to proceed is to either take a small bet, or a number of small bets, and let the results dictate the next course of action. This is a far superior way to deal with uncertainty then taking a long term view — in this case bottom-up beats top-down.

Mistakes should be celebrated as long as they do not sink the ship, i.e. actions can be seen a call option.

Options increase value because they increase choices that will be available to us in the future.

Why do some companies such as mining exploration, Web 2.0 or biotech companies command multi-million or billion dollar valuations when they have never made a single cent in profit (and sometimes even revenue)?

That’s right… options! In other words, exposure to a massive upside.

Whether in business or life, don’t be afraid to make mistakes — they increase choices available in the future and means exposure to potentially very lucrative or profitable opportunities just like a biotech company.

One more thing… mistakes are essential for innovation but more on innovation in a future post.

99% Failure Rate

I’ve been dealing with businesses, investing and marketing ‘stuff’ as far back as I can remember. I come from a family of business owners for at least a few generations.

And I run a startup… I’m not sure if this puts me at an advantage or a disadvantage. Interestingly, it wasn’t until a few months after starting a startup that I realised that I actually didn’t know what I was doing! Just being honest. (More about the power of mistakes in a future post).

It also dawned on me that there is actually a 99% (or higher) chance of failure.

Why bother when there is near certainty that this experience will probably be just that… an experience. Hopefully, it prepares an aspiring entrepreneur for the next venture. Cost of entry to big leagues.

There are a lot of books that talk about the <insert an odd-number> Steps To Business Success.

Unfortunately, these books are almost always useless. Many courses and seminars by successful entrepreneurs about how they made it are also useless.

Why?

I learnt something from Dr Van Tharp, a trainer of traders (http://www.iitm.com).

Van has trained many financial market traders and a few super-traders as well — some super traders have track records that will make Warren Buffet’s track record look like returns from a term deposit!

Back to what I learnt from Van — a trader must know himself before he can consistently make money. All of your success is related to your psychology. The ability to take losses and the ability to let your winners run. The ability to get back on the horse after falling flat on your face. (Apologies to Van if I’m not expressing his ideas as elegantly as he does).

Everyone’s psychology is different… which is why an asset class or financial instrument is irrelevant, i.e. what you use to make money is irrelevant. There are examples of people who have done very well in futures, options, stocks, commodities, properties, inventions, wines, horses, businesses, …

What you ‘trade’ needs to be consistent with who you are.

This is precisely why some introspection may be necessary before you attempt a risky venture. But mental work is hard work!

An even better approach is to just start — introspection through action! As long as you have your downside covered, you’ve bought a call option. That way you know your downside before you start. And this is far better than jumping in with rose-coloured glasses.

99% chance of failure… what’s not to like.